SIMON LAMBERT: What makes a business great - can it really be as simple as following these three rules?

What is it that makes a business great? Call to mind the ones that might count and it’s tempting to think of world beaters and corporate giants, but you don’t have to be a colossus to have a great business.

Small and medium-sized businesses can fit the bill too.

Doing something really well and making the world richer for your existence makes you great in your own right.

A great British business: McLaren's concept of building world-class supercars could fit the three rules

Now some might argue that is too broad a definition of a great business. That, in fact, these are simply good ones.

I take that point on board, yet I would counter that firstly, I’m describing them as great not one of the greats – and I’m not trying to start a debate about semantics.

Furthermore, we should do more to celebrate businesses that put doing a fantastic job at their heart – and simply calling them good doesn’t do the trick.

Describing a more minor enterprise as great, does nothing to detract from the all-conquering world-beaters.

So can there a recipe for doing well? Something that defines how a great business operates.

There are no shortage of business manuals that claim to have the answer, to varying degrees of usefulness, but one study published last year took a swipe at this genre and tried to distil the formula into just three things.

A pair of US business experts, Michael E. Raynor and Mumtaz Ahmed, analysed more than 25,000 companies from 1966 to 2010, to see if they could put their finger on the secret of success. From this they narrowed the field down to 344 they identified as having truly exceptional performance.

Their first observation was that a lot of the thinking behind traditional studies and business help books underestimates the power of luck in delivering shorter-term success, so ‘much of the strategy and management advice businesses leaders turn to is unreliable or impractical’.

In contrast, they believed there was a common factor that united the businesses they defined as proving to be exceptional over a sustained period - the choices they made to become great could be boiled down to three rules:

1. Better before cheaper—in other words, compete on differentiators other than price.

3. There are no other rules—so change anything you must to follow Rules 1 and 2.

That summary of their three rules is taken from a Harvard Business Review article on the study, written by the authors, which you can find here [you need to register to read it but that is free].

The idea is that businesses that apply these rules to their decisions, can dramatically increase their chances of success. They will be signing up to a philosophy that the authors claim cuts through all of the exceptional companies they found.

They should opt to strive for quality and to do things better rather than involve themselves in a price-cutting race to the bottom.

They should decide to grow profits through increasing their revenue rather than cost-cutting, so either by maintaining a higher price and higher profit margin, or by selling more.

And they should work to those two rules when making a decision, no others should be considered above them.

Secret of my success: Can it really boil down to following three simple rules?

In that Harvard Business Review article the authors said: ‘We found individual companies that had remained exceptional despite changing their approaches to a number of critical determinants of performance.

'The reason? The changes they made kept them aligned with the first two rules.

'In other words, top-performing companies are doggedly persistent in seeking a position unrelated to low prices and adopting a revenue-driven profitability formula, while everything else is up for grabs.’

Translated out of that slight business jargon, this says: if you want to be a long-term winner don’t make being cheap your sole selling point, and use quality or sales to grow profits - not cost-cutting.

A criticism is that these would seem to be easier principles to put in place if you are operating at the high end of things.

A currently great British company in my eyes is McLaren Automotive. Spun out of the Formula 1 team three years ago, it set out to make world-class supercars and take on the likes of Ferrari, Porsche and Lamborghini.

It announced this week that it made it into profit, reporting operating profit of £14.4million and £4.5millon pre-tax profit last year, during only its third year of making cars. It delivered 1,395 cars, made at its plant in Woking, Surrey, with sales of £285million and wants to grow that to £500million in the coming year.

It seems highly likely McLaren is working to a similar philosophy to the one outlined above, but then if you make cars that cost between £176,000 and £1million you might be expected to do that.

But the study also highlighted exceptional companies that fitted the philosophy and operated in some far less luxurious markets, a trucking firm Heartland Express, and a discount chain shop Family Dollar Stores.

And I must admit that I look at the struggles of Tesco and some of its fellow supermarket strugglers and can’t help but think they would do well to apply these rules to themselves, rather than engaging in endless rounds of price cuts shoppers don’t really believe in.

After all, it was not just low prices that pulled people into Aldi and Lidl, it was the quality of their food at a good price that did it.

The study seems to have mainly focussed on sizeable companies, but the formula can be applied to any business, big or small.

And the good news for SMEs is that it’s easier to try and apply those rules to a smaller more nimble business that a corporate behemoth. Follow that logic through and small and medium-sized firms have a better chance of being a great business.

I wouldn’t necessarily say these rules are the key to magically becoming being a great business. However hard you apply them they probably won’t help you if your product or service is a dud. But they do have a certain appeal.

It would be intriguing to see a similar study done on British business, big and small.

PS. Come and listen to business stars for free

Lord Young and Michelle Mone OBE will be at the Future of British Growth event highlighted below

ENTERPRISE STARS GIVE THEIR TIPS FOR GROWING A BUSINESS

In terms of producing great businesses, I think Britain has excelled through the tough years following the financial crisis.

One of the pleasures of my job is that every day I get to hear fresh stories about people who have spotted an opportunity, taken a risk, and worked hard to build their idea into a success.

The quality and innovation coming through over recent years has been a testament to our enterprising nation.

One question for those who managed to thrive through recession, is how to do it through recovery too - and do they need to adapt to do so?

That will be one of the topics up for debate at the Future of British Business Growth event next Tuesday, which This is Money is supporting. It’s free and features a panel of business experts (and me).

Panelists include Emma Jones, long-term entrepreneur and founder of Enterprise Nation, Richard Reed, co-founder of Innocent Drinks, Michelle Mone OBE, creator of Ultimo, the UK’s leading designer lingerie brand and one of the top three female entrepreneurs in the UK, and Tom Lawton, founder of BubblePix Ltd and judge on the BBC’s My Genius Idea.

Lord Young of Graffham, enterprise adviser to the Prime Minister, will also speak at the event.

It is being held at London's British Museum, on Tuesday June 10 and is free to attend, although you must register for a ticket.